Rule 701-Exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation

Absent an available exemption, the Securities Act of 1933 (“Securities Act”) requires that a registration statement be filed with the Commission disclosing prescribed categories of information before securities may be offered for sale. Where a registration statement is required, securities may not be sold to the public until the registration statement becomes effective. Congress recognized that in some situations there may not be a need for registration in connection with offers and sales of securities; it provided a number of exemptions from Securities Act registration and provided the Commission with authority to adopt exemptions from Securities Act registration. Rule 701 (17 CFR 230.701) provides an exemption from Securities Act registration for an issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (“non-reporting issuer”) for offers and sales of securities under a written compensatory benefit plan or written compensation contract established by the issuer (or its parents, its majority-owned subsidiaries, or majority-owned subsidiaries of the issuer’s parent) for the participation of their employees, directors, general partners, trustees, officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. The total sales price or maximum amount of securities that may be sold under Rule 701 during any consecutive 12-month period must not exceed the greatest of: (1) $1 million, (2) 15% of the total assets of the issuer (or its parent company if the issuer is a wholly-owned subsidiary, subject to certain conditions), or (3) 15% of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701. All issuers relying on Rule 701 must deliver to investors a copy of the compensatory benefit plan or contract. In addition, if the total sales price or amount of securities sold during any consecutive 12-month period exceeds $10 million, the issuer must deliver the following additional disclosure to investors a reasonable period before the date of sale (or, for derivative securities, including options, the date of exercise or conversion, or, for deferred compensation or similar plans, the date the irrevocable election to defer is made): (1) a copy of the summary plan description required by the Employee Retirement Income Security Act of 1974 (“ERISA”) or, if the plan is not subject to ERISA, a summary of the material terms of the plan, (2) information about risks associated with investment in the securities, (3) the financial statements required to be furnished by Part F/S of Form 1-A under Regulation A, and (4) parent financial statements (where the issuer uses its parent’s total assets to determine the amount of securities that may be sold). The purpose of Rule 701 is to enable non-reporting issuers to compensate employees and others without registering an offer and sale of securities under the Securities Act, while requiring issuers, as a condition of reliance on the rule, to provide investors with certain information that is important to investment decision making.

The latest form for Rule 701-Exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation expires 2028-12-31 and can be found here.